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News You Need to Know

March 11, 2009

Job Losses: No End in Sight

That giant sucking sound is U.S. jobs going down the drain: 651,000 positions disappeared in February, said the Labor Dept. on Mar. 6, with the unemployment rate jumping to 8.1%. And forecasters say we ain't seen nothin' yet. On Mar. 10, Bloomberg reported that economists in its monthly survey expect U.S. joblessness to reach 9.4% by yearend. The World Bank predicted on Mar. 8 that "the global economy is likely to shrink this year for the first time since World War II." That's why Treasury Secretary Timothy Geithner, headed for a meeting of the Group of 20 finance ministers in London, will be pushing his brethren for far stronger stimulus.

Citi Spurs the Street

Longing for some reason to hope, Wall Street caught a whiff of good news from Citigroup (C) on Mar. 11 and promptly staged the biggest rally of the year, with the Dow jumping 379 points, or 5.8%. In a memo sent to employees the night before, CEO Vikram Pandit said the beleaguered bank had booked more than $8 billion in operating profit in January and February. And after putting Citi through a stress test that used more pessimistic assumptions than the Fed's own upcoming tests, Pandit proclaimed his confidence in its capital strength. Citi stock rose 38% that day, though that's not saying much, since it closed at 1.45, far below the 7 it traded for at the start of the year and a world away from its peak of about 55 in 2007.

Traders were also cheered by two other developments. Fed Chairman Ben Bernanke, in a Washington speech, said he favors easing the strict mark-to-market rules that force financial institutions to carry assets on their books at their current value—which these days is often zero, since there's no market at all. And the SEC announced that it will examine reinstating the so-called uptick rule, which sets limits on the short-selling many feel has exacerbated the dizzying fall in the equity markets. In other banking news, New York Attorney General Andrew Cuomo on Mar. 11 accused Merrill Lynch of "misleading" Congress about the timing of those now-infamous bonuses.

See "Citi: Pandit's Defense Boosts Wall Street"

Geithner Speaks

Appearing on PBS's Charlie Rose show on Mar. 10, Treasury Secretary Geithner sketched in some details of his promised public-private partnership to extract toxic assets from bank balance sheets. The basic idea is that Washington will offer financing to private investors to buy the assets—and will inject capital into the banks as an incentive to sell them, presumably at deep discounts. "The art" in carrying out the plan, Geithner told Rose, will be to price the government loans cheaply enough to make them attractive now, but high enough to send investors to private lenders once the credit markets start to function more smoothly.

Scanty Stimulus?

The world's biggest economies aren't doing enough to counteract the downturn—at least, so says a March paper from the Brookings Institution. Looking at the Group of 20 nations, economist Eswar Prasad and researcher Isaac Sorkin figured that the various stimulus plans announced by governments add up to a little more than 1.1% percent of global GDP, whereas the IMF has said 2% is what's needed to drag the world out of its slump. Only the U.S. and China "have responded forcefully, with impressive packages," they write. (Brookings Institution)

Merck's Growth Pill

Another pharma outfit down the hatch: Merck agreed to swallow New Jersey neighbor Schering-Plough (SGP) for $41.1 billion on Mar. 9, six weeks after Pfizer (PFE) said it will buy Wyeth (WYE) for $68 billion. Merck, like Pfizer, faces anemic revenues over the next few years as its top drugs lose patent protection, so Merck CEO Richard Clark aims to grab new products to replace the old. Expect more pharma deals as companies look to beef up to compete with their newly muscled rivals. Next in line: Roche (RHHBY) is widely expected to win its four-month campaign for the 44% of Genentech (DNA) it doesn't already own.

Oil on the Rise

To nearly everyone's astonishment, OPEC appears to be putting a floor under oil prices—and perhaps even pushing them toward its $75-per-barrel target. A barrel of black gold has climbed from a low of $34 in December to about $47 on Mar. 10, though it sank back to around $42 the next day on rumors that the cartel won't ask for more cuts at its Mar. 15 meeting in Vienna. OPEC has already called for cuts of 4.2 million barrels per day, and compliance, at about 80%, has been better than expected. What's more, the decline in demand appears to be slowing.

Grinding Gears in Asia

China's mighty machine continues to seize up. Mainland exports collapsed by 25.7% in February from the same month in 2008, after a 17.5% fall in January as consumers in the U.S. and Europe kept their wallets tightly shut. Given the resulting job losses, it's not surprising that domestic sales are slow as well:Weak demand led to China's first bout of deflation in six years, with the February consumer price index falling 1.6% from a year ago. And across the Sea of Japan, Tokyo said January exports tanked by 45.7%, yielding a record monthly trade deficit of $9.85 billion.

See See "Recession Slams Chinese Exports Again"

Madoff's Plea

When Bernard Madoff first told the feds that he may have fleeced investors to the tune of $50 billion, some thought the figure improbably grandiose. But in charges unsealed on Mar. 10, prosecutors say the amount is more like $65 billion. At a hearing scheduled for Mar. 12, Madoff was expected to plead guilty to 11 felonies, including wire and securities fraud, money laundering, perjury, and theft, which would likely land the 70-year-old alleged Ponzi king in prison for the rest of his life. Since his arrest in December, Madoff has been free on $10 million bail, but prosecutors could ask that it be revoked once he pleads guilty. And while recent filings hint that he may have had help carrying out his decades-long scheme, the authorities have yet to say anything concrete about employees or family members.

UTC Gets Even Slimmer

Although Ben Bernanke still wistfully mentions the hope that a recovery could begin later this year, the companies out there making things beg to differ. United Technologies (UTX), owner of Otis elevators and Pratt & Whitney jet engines among other businesses, said on Mar. 10 that it will cut 11,600 more jobs this year as orders in its aerospace and construction markets have evaporated. Along with layoffs already announced, the cuts will total 18,000 jobs, or 8% of the workforce. A recovery in the back half of 2009 "now appears unlikely," said CEO Louis Chenevert.

Dow Says: Oh, All Right

Sometimes a court date can powerfully concentrate the mind. Just days before heading to trial, Dow Chemical (DOW) agreed to buy Rohm & Haas (ROH) after all in a deal originally struck last July. Dow had hoped to wriggle out as the recession worsened, which prompted Rohm to sue in January. The settlement calls for Rohm's two biggest shareholders to invest as much as $3 billion in the combined company, which pares the amount Dow will need to borrow. Still, the $16.3 billion deal saddles Dow with an enormous debt load, and credit-rating agencies weren't happy.

Will Opel Crash?

General Motors (GM) Opel unit is running on fumes as the German government debates whether to support a $4.2 billion repair plan. As Opel's finances have grown more shaky, politicians from regions with Opel factories have been clashing with those whose constituencies include rival carmakers Volkswagen (VLKAY), BMW, and Daimler (DAI). But a rescue, which would probably also be funded by other countries that have Opel plants, such as Britain, still seems likely. In an election year, Chancellor Angela Merkel won't want the blame for throwing 28,000 German Opel workers out of work—not to mention many more at parts suppliers.

A Successor at P&G?

The race for the coveted chief executive's chair at Procter & Gamble (PG) suddenly looks easier to call now that Susan Arnold, head of global business units, has officially dropped out. P&G announced Arnold's resignation on Mar. 9, thrusting COO Robert McDonald into the front-runner spot to replace CEO A.G. Lafley. Lafley, 61, has held the job nearly a decade and is approaching P&G's retirement age of 65. Though McDonald, 55, now looks like the heir apparent, should Lafley decide to serve for more than a couple of years, a younger officer, such as Robert Steele or Ed Shirley, could surge into contention.

See "P&G's Succession Race Narrows"

Mobile Wars in the Gulf

A discount battle has broken out between mobile-phone companies in the Gulf States as more carriers have entered the market, reports the March edition of BusinessWeek Al-Arabiya. In the United Arab Emirates, cell-phone penetration surpasses that of the U.S. The competition in some markets has become so fierce that it's forcing even dominant players to look outside their borders for growth. Kuwait's Zain Group, which already has a footprint in 22 countries, in February unveiled a plan to roll out mobile banking to more than 100 million customers in Africa via a new service called Zap.